This is isn’t good:
Since 1978, the price of tuition at US colleges has increased over 900 percent, 650 points above inflation. To put that number in perspective, housing prices, the bubble that nearly burst the US economy, then the global one, increased only fifty points above the Consumer Price Index during those years. But while college applicants’ faith in the value of higher education has only increased, employers’ has declined. According to Richard Rothstein at The Economic Policy Institute, wages for college-educated workers outside of the inflated finance industry have stagnated or diminished. Unemployment has hit recent graduates especially hard, nearly doubling in the post-2007 recession. The result is that the most indebted generation in history is without the dependable jobs it needs to escape debt.
What kind of incentives motivate lenders to continue awarding six-figure sums to teenagers facing both the worst youth unemployment rate in decades and an increasingly competitive global workforce?
During the expansion of the housing bubble, lenders felt protected because they could repackage risky loans as mortgage-backed securities, which sold briskly to a pious market that believed housing prices could only increase. By combining slices of regionally diverse loans and theoretically spreading the risk of default, lenders were able to convince independent rating agencies that the resulting financial products were safe bets. They weren’t. But since this wouldn’t be America if you couldn’t monetize your children’s futures, the education sector still has its equivalent: the Student Loan Asset-Backed Security (or, as they’re known in the industry, SLABS).
SLABS were invented by then-semi-public Sallie Mae in the early ’90s, and their trading grew as part of the larger asset-backed security wave that peaked in 2007. In 1990, there were $75.6 million of these securities in circulation; at their apex, the total stood at $2.67 trillion. The number of SLABS traded on the market grew from $200,000 in 1991 to near $250 billion by the fourth quarter of 2010. But while trading in securities backed by credit cards, auto loans, and home equity is down 50 percent or more across the board, SLABS have not suffered the same sort of drop. SLABS are still considered safe investments—the kind financial advisors market to pension funds and the elderly.
(more via link above)
While full, economic fees will have to return in some form – student loans as the mechanism are on this evidence not a good option…
The Brown Report is now available. It proposes a deferred payment model to part-fund third-level in the UK.
•• Students pay nothing up front. Graduates only make payments when they are earning above
£21,000 per year.
•• Payments are affordable – 9% of any income above £21,000.
•• If earnings drop, then payments drop. If graduates stop work for whatever reason, then payments stop
•• The payment threshold is reviewed regularly to bring it into line with growth in earnings
•• The interest rate on the loans is the low rate that Government itself pays on borrowing money. There is a rebate for low earners.
•• Any balance remaining after 30 years is written off
The report is a model of clarity. Will the Hunt Report be similar?
More from The Economist on American Universities. Three points that particularly stand out:
- Mr Hacker and Ms Dreifus point out that senior professors in Ivy League universities now get sabbaticals every third year rather than every seventh. This year 20 of Harvard’s 48 history professors will be on leave.
- America’s commitment to research is one of the glories of its higher-education system. But for how long? The supply of papers that apply gender theory to literary criticism remains ample. But there is evidence of diminishing returns in an area perhaps more vital to the country’s economic dynamism: science and technology. The Kauffman Foundation, which studies entrepreneurship, argues that the productivity of federal funding for R&D, in terms of patents and licences, has been falling for some years. Funding is spread too thinly. It would yield better results if concentrated on centres of excellence, but fashionable chatter about the “knowledge economy” stirs every congressional backwoodsman to stick his fingers into the university pie.
- The Goldwater Institute points to a third poison to add to rising prices and declining productivity: administrative bloat. Between 1993 and 2007 spending on university bureaucrats at America’s 198 leading universities rose much faster than spending on teaching faculty. Administration costs at elite private universities rose even faster than at public ones. For example, Harvard increased its administrative spending per student by 300%. In some universities, such as Arizona State University, almost half the full-time employees are administrators. Nearly all university presidents conduct themselves like corporate titans, with salaries, perks and entourages to match.
Point 2 is worrying, but rectifiable. Europe could even get ahead of the USA if it ever got its act together on achieving the 3% of GNP invested in R&D target.
Point 3 seems not to be true of European Universities, but it would great to see all universities start produce these metrics in terms of spend per student, as then we could see easy and direct comparisons between our universities in terms of their financial management.
And of course the petrolheads will point out that Ford is back to health, as is GM!
The UK needs to address its budget deficit. This column, introducing a new CEPR Policy Insight, argues against cuts in government contributions to the tuition chargeable by universities, warning that they would make the UK poorer, economically and culturally. It suggests instead additional deferred fees that graduates can pay later in their career when their income allows it.
Shephard, Neil (2009), “Income contingent tuition fees for universities”, CEPR Policy Insight 42.
This article may be reproduced with appropriate attribution. See Copyright (below).
The UK Government has a large structural budget deficit. Whichever party wins the next general election, it is clear that it will either cut the real value of government spending or at least have very modest real growth rates. Higher education will be a tempting target for slicing “efficiency gains”. Indeed, the Higher Education Funding Council of England announced a cut of roughly 1% on 13 May 2009. From July 2009, it has been consulting on a further 1.2% reduction that they may introduce in 2010-2011.
Given the state of the public finances, the government may eventually have to reduce its various contributions to the tuition chargeable by universities some 10% to 20% (in real terms). In the long run, that would threaten the quality of English undergraduate education, which could in turn inflict lasting damage on one of the UK’s most successful sectors – a sector that also generates a large volume of exports.1 It would likely make the UK poorer, economically and culturally.
Some university leaders have suggested that student tuition fees, funded through “income-contingent loans” supplied by the government, should rise to make up for any shortfalls in underfunded teaching costs.2 Rather surprisingly, under the current funding model, an increase in the level of tuition fees in fact increases public sector debt. I will explain why and what might be done about this to mitigate the rise in national debt. The most important mitigation is to remove the interest rate subsidy graduates receive on their tuition loans. Barr (2004) has demonstrated that this subsidy is very expensive and an inefficient way of providing financial support to higher education students. I entirely agree with him that it should be removed.
In CEPR Policy Insight 42, I argue that the UK Government should go further. I think the Government should allow universities to charge their graduating students additional fees if their teaching costs are not met by the current total tuition payment. I will call these “deferred fees” or income-contingent tuition fees. Deferred fees are additional teaching fees due to the university. They can be paid to the student’s university either
- upfront by the parents of the student (or the students themselves), or
- by the graduate once his/her income rises above a defined threshold and once their national maintenance and tuition loans are repaid.
If the graduate’s income is not sufficient to make the repayments during their career, the fee is forgiven. Note that the university would not be given extra upfront cash by the state or the Student Loan Company. This means that such fees are neutral on the fiscal position of the state, the size of the Student Loan Company’s loan book, and the financial position of the universities that do not introduce such fees. The implications of variable deferred fees for fee caps, charitable giving, means testing, and student debt are discussed in the Policy Insight.
1 Throughout I will discuss solely English universities. However, the same type of structure is broadly in place in Wales and Northern Ireland and also applies to English students who study at Scottish universities.
2 For example, in March 2009 Sir Roy Anderson, Rector of Imperial College, advocated the tuition fee cap should rise by between £3,000 and £6,000.
Barr, Nicholas (2004), “Higher education funding,” Oxford Review of Economic Policy, 20, 264-283.
Hard to improve on this Irish Times Editorial – it says it all. The sector is in crisis, and meanwhile is expected to be engine of the smart economy and to drive innovation and smart job creation. Guess what? It’s not going to happen with the current mind-boggling disinvestment in the sector. Maintaining standards as they are is going to be a challenge, let alone raising our game to the next level. And the effects of these cutbacks will be seen in the coming years as lower and slower economic growth.
How will the universities will deliver the Innovation Agenda, when staff numbers and resourcing are dramatically and arbitrarily cut? Want to know why there is no Irish Google? It’s because there is no Irish Stanford! Universities which function as beacons to attract the brightest and the best from all over the world are required here if we wish to transform the Irish economy for ever. We are fooling ourselves if we think the current approach of investing less to achieve more is going to succeed.
THE EXTENT of the financial and operational crisis facing the university sector has been outlined in a stark letter sent to the seven presidents by Higher Education Authority (HEA) chief executive Tom Boland. He tells the colleges to brace themselves for an unprecedented range of cuts over the next year as the Government seeks to achieve €3 billion in overall exchequer savings. Colleges are advised to take “whatever action is needed’’ in advance of reductions in core funding.
Cutbacks in staff numbers and in the range of programmes on offer appear inevitable. The colleges have been told also they can expect no increase in student charges for the next academic year.
For its part, the Government appears to be in denial about the true extent of the crisis. It has identified the universities as a key player in economic revival. There is giddy talk about initiatives which will see thousands of foreign students clamouring for places in our universities; all this when many lecture halls are overcrowded and laboratory facilities are often meagre.
See also this post on science funding and the lack of an Irish Nokia.